A New Concern for Content Licensors: Perpetual Licensees Deemed to Be Owners

With the tremendous growth of digital media, content such as music, images, books, and software is increasingly distributed pursuant to a license rather than by a traditional sale with a transfer of title. The distinction between a traditional sale and a license can be important, because a “licensee” is not necessarily given the same rights under the Copyright Act as an “owner” who purchases a work and acquires title to it. Two courts in the Ninth Circuit have recently addressed how to differentiate between an “owner” and a mere “licensee” for purposes of rights under the Copyright Act, and have reached decisions that might surprise many practitioners.

Different Rights for an Owner and a Licensee

When a copyrighted work is sold, the intellectual property contained therein remains subject to the full panoply of restrictions of the Copyright Act that, for example, prohibit the purchaser from copying the content or creating derivative works. But the copyright holder no longer has the exclusive right of distribution with regard to the particular copy that was transferred, pursuant to the doctrine of “exhaustion” or “first sale,” codified as 17 U.S.C. '109. This allows a rightful owner of a particular copy of a work to lawfully effect a subsequent sale or transfer of that particular copy. This doctrine has allowed for the development of markets for used books, records, and other goods, as well as allowing intermediaries such as distributors and retailers to sell to customers without explicit permission from copyright holders each step of the way.

The doctrine of exhaustion, however, is avoided if there is no transfer of “ownership” of the work. One method by which copyright owners often avoid the doctrine of exhaustion and restrict subsequent transfers is by licensing copies of the work instead of selling them. The prevailing view is that under the Copyright Act, a “licensee” is generally not considered to be an “owner,” so the transfer is not subject to the doctrine of exhaustion.

Two recent decisions, Vernor v. Autodesk, Inc., 555 F. Supp.2d 1164 (W.D. Wash. 2008) and UMG Recordings, Inc. v. Augusto, 558 F. Supp.2d 1055 (C.D. Cal. 2008), however, addressed whether agreements purported to be licenses are nonetheless sales with a transfer of ownership for purposes of the Copyright Act. The courts in UMG, with regard to promotional compact discs, and Vernor, with regard to software, held the purported licenses at issue to be sales and the licensees to be “owners” for purposes of the doctrine of exhaustion. These courts characterized the transfers as sales based almost exclusively on the fact that the transferee was allowed to keep the copy indefinitely.

Vernor and UMG

On multiple occasions, Timothy Vernor purchased used packages of Autodesk's software and posted them for sale on eBay. Each time, Autodesk responded by sending a DMCA takedown notice to eBay and each time Vernor sent a counter-notice claiming the sale was lawful, and then the items were relisted. In 2007, when Autodesk sent a DMCA takedown notice, eBay suspended Vernor's account. Vernor thereafter sought a declaratory judgment that his sale of Autodesk software was lawful pursuant to the doctrine of exhaustion.

In Vernor v. Autodesk, Inc., the court reviewed the agreement between the parties to the original transfer in order to determine if there had been a transfer of ownership. It evaluated the economic realities of the transaction instead of merely relying on whether the transaction was characterized in the agreement as a “license” or “sale.” In Vernor, the software at issue had been transferred by Autodesk to the company from which Vernor bought it, CTA, subject to an agreement titled “License Agreement” that granted a “nonexclusive, nontransferable license to use the enclosed program” and prohibited the “rent, lease, or transfer [of] all or part of the Software, Documentation or any rights granted [in the agreement].” 555 F. Supp.2d at 1166.

In evaluating the agreement, the court reasoned that the salient factor in distinguishing a “sale” from a “license” was “whether the transferee kept the copy acquired from the copyright holder.” The court held that if the transferor required that the copyrighted work be eventually returned, then there was no sale, but if no return was required ' even if the transferee was required to destroy the work ' then the transfer was a sale. The Vernor court therefore held that the transfer to CTA had been a “sale with contractual restrictions on the use and transfer of the software,” rather than a license. Thus, CTA, and as a subsequent purchaser, Vernor, could invoke the first sale doctrine, and the resale of the Autodesk software would not be a copyright violation.

A few weeks later, a similar decision was issued in UMG Recordings, Inc. v. Augusto. The defendant in Augusto had posted for sale on eBay several promotional CDs that UMG had originally distributed for free to “music industry insiders” to promote the label's artists. These CDs had been stamped with language stating that they were not for resale, which UMG asserted was a limited “license” to use the CD. UMG filed an action against Augusto for copyright infringement, and Augusto asserted the doctrine of first sale as a defense.

Similar to the court in Vernor, though without citing that decision, the UMG court reasoned that the transferee's right to perpetual possession was “critical” to Augusto's first sale defense. The UMG court noted two additional factors: whether the transferor had a recurring benefit from the continued possession by the transferee, and whether the purpose of the license was to restrain trade. With regard to the recurring benefit, the court reduced this issue to the concept that the transferee could keep the CD forever without further payment ' essentially the same consideration as the right to perpetual possession. With regard to the consideration of the restraint of trade, the court reasoned that virtually all licenses restrain trade, and as such are anti-competitive. In essence, the court relied almost entirely on the fact that the recipients were not required to return the CDs to conclude that the transfer was “properly characterized as a gift or sale,” and Augusto's subsequent sale of the CDs was “protected by the first sale doctrine.” 558 F. Supp.2d at 1062.

In reaching their conclusions, both the Vernor and UMG courts relied heavily upon a 30-year-old criminal copyright case, United States v. Wise, 550 F.2d 1180 (9th Cir. 1977). In that decision, the Ninth Circuit, in large part but with one exception, affirmed a multiple count conviction of a defendant for criminal copyright infringement for illegal distribution of copyrighted movie prints. The defendant contended that his distribution of the film prints was not an infringement because it was protected by the doctrine of first sale. According to the Ninth Circuit, the majority of the prints had been transferred by the studios to various entities or “V.I.P.s” with express provisions regarding broadcast or exhibition, for a limited time period, with provisions requiring the prints be returned to the studios. The court held that these prints were licensed and therefore not subject to the doctrine of first sale.

However, the Wise court distinguished from the others one agreement between Warner Brothers and Vanessa Redgrave. That agreement allowed Redgrave to keep the print perpetually in return for an upfront payment, though it prohibited her from selling, loaning, or licensing the film. The Wise court held this agreement to be a sale, as opposed to a license. The Vernor and UMG decisions seized upon this distinction and held that the key factor to distinguish between a sale and a license is whether the transferee is entitled to perpetual possession.

However, earlier decisions in the Ninth Circuit do not place such an emphasis on possession of a copy to differentiate between an owner and a licensee. For example, in Wall Data v. Los Angeles County Sheriff's Dept., 447 F.3d 769 (9th Cir. 2006), the court refused to allow a licensee the benefit of '117 of the Copyright Act, which allows an “owner” of a copy of a copyrighted work to make another copy in limited circumstances. The court in Wall Data stated that because the possession of the software was subject to an agreement with “significant restrictions on the purchaser's ability to redistribute or transfer that copy, the purchaser is considered a licensee, not an owner, of the software.” 447 F.3d at 785.

The Wall Data decision suggests that a court should consider a much wider set of factors in determining whether an agreement is a sale or license, rather than focusing upon whether there has been a grant of perpetual possession. In addition to considering the overall terms of agreement, a court should also consider whether the license is being used for anti-competitive purposes or whether it is primarily a method to promote or encourage a free or subsidized distribution. A free distribution is often assisted through a copyright holder's ability to control downstream use through licensing, as is currently becoming more common with open-source software.

Conclusion

It is likely there will be more decisions clarifying the proper test to distinguish between a licensee and an owner. In the meantime, practitioners should be careful to keep an eye on the changing rules. When drafting content licenses, it may be worthwhile, when possible, to include a requirement that the licensee return the product after the completion of the licensee's use or at least provide that the licensor retains the right to regain possession.

Jason D. Sanders is an intellectual property attorney practicing in New York. He can be reached at jasond [email protected].

With the tremendous growth of digital media, content such as music, images, books, and software is increasingly distributed pursuant to a license rather than by a traditional sale with a transfer of title. The distinction between a traditional sale and a license can be important, because a “licensee” is not necessarily given the same rights under the Copyright Act as an “owner” who purchases a work and acquires title to it. Two courts in the Ninth Circuit have recently addressed how to differentiate between an “owner” and a mere “licensee” for purposes of rights under the Copyright Act, and have reached decisions that might surprise many practitioners.

Different Rights for an Owner and a Licensee

When a copyrighted work is sold, the intellectual property contained therein remains subject to the full panoply of restrictions of the Copyright Act that, for example, prohibit the purchaser from copying the content or creating derivative works. But the copyright holder no longer has the exclusive right of distribution with regard to the particular copy that was transferred, pursuant to the doctrine of “exhaustion” or “first sale,” codified as 17 U.S.C. '109. This allows a rightful owner of a particular copy of a work to lawfully effect a subsequent sale or transfer of that particular copy. This doctrine has allowed for the development of markets for used books, records, and other goods, as well as allowing intermediaries such as distributors and retailers to sell to customers without explicit permission from copyright holders each step of the way.

The doctrine of exhaustion, however, is avoided if there is no transfer of “ownership” of the work. One method by which copyright owners often avoid the doctrine of exhaustion and restrict subsequent transfers is by licensing copies of the work instead of selling them. The prevailing view is that under the Copyright Act, a “licensee” is generally not considered to be an “owner,” so the transfer is not subject to the doctrine of exhaustion.

Two recent decisions, Vernor v. Autodesk, Inc., 555 F. Supp.2d 1164 (W.D. Wash. 2008) and UMG Recordings, Inc. v. Augusto, 558 F. Supp.2d 1055 (C.D. Cal. 2008), however, addressed whether agreements purported to be licenses are nonetheless sales with a transfer of ownership for purposes of the Copyright Act. The courts in UMG, with regard to promotional compact discs, and Vernor, with regard to software, held the purported licenses at issue to be sales and the licensees to be “owners” for purposes of the doctrine of exhaustion. These courts characterized the transfers as sales based almost exclusively on the fact that the transferee was allowed to keep the copy indefinitely.

Vernor and UMG

On multiple occasions, Timothy Vernor purchased used packages of Autodesk's software and posted them for sale on eBay. Each time, Autodesk responded by sending a DMCA takedown notice to eBay and each time Vernor sent a counter-notice claiming the sale was lawful, and then the items were relisted. In 2007, when Autodesk sent a DMCA takedown notice, eBay suspended Vernor's account. Vernor thereafter sought a declaratory judgment that his sale of Autodesk software was lawful pursuant to the doctrine of exhaustion.

In Vernor v. Autodesk, Inc. , the court reviewed the agreement between the parties to the original transfer in order to determine if there had been a transfer of ownership. It evaluated the economic realities of the transaction instead of merely relying on whether the transaction was characterized in the agreement as a “license” or “sale.” In Vernor, the software at issue had been transferred by Autodesk to the company from which Vernor bought it, CTA, subject to an agreement titled “License Agreement” that granted a “nonexclusive, nontransferable license to use the enclosed program” and prohibited the “rent, lease, or transfer [of] all or part of the Software, Documentation or any rights granted [in the agreement].” 555 F. Supp.2d at 1166.

In evaluating the agreement, the court reasoned that the salient factor in distinguishing a “sale” from a “license” was “whether the transferee kept the copy acquired from the copyright holder.” The court held that if the transferor required that the copyrighted work be eventually returned, then there was no sale, but if no return was required ' even if the transferee was required to destroy the work ' then the transfer was a sale. The Vernor court therefore held that the transfer to CTA had been a “sale with contractual restrictions on the use and transfer of the software,” rather than a license. Thus, CTA, and as a subsequent purchaser, Vernor, could invoke the first sale doctrine, and the resale of the Autodesk software would not be a copyright violation.

A few weeks later, a similar decision was issued in UMG Recordings, Inc. v. Augusto. The defendant in Augusto had posted for sale on eBay several promotional CDs that UMG had originally distributed for free to “music industry insiders” to promote the label's artists. These CDs had been stamped with language stating that they were not for resale, which UMG asserted was a limited “license” to use the CD. UMG filed an action against Augusto for copyright infringement, and Augusto asserted the doctrine of first sale as a defense.

Similar to the court in Vernor, though without citing that decision, the UMG court reasoned that the transferee's right to perpetual possession was “critical” to Augusto's first sale defense. The UMG court noted two additional factors: whether the transferor had a recurring benefit from the continued possession by the transferee, and whether the purpose of the license was to restrain trade. With regard to the recurring benefit, the court reduced this issue to the concept that the transferee could keep the CD forever without further payment ' essentially the same consideration as the right to perpetual possession. With regard to the consideration of the restraint of trade, the court reasoned that virtually all licenses restrain trade, and as such are anti-competitive. In essence, the court relied almost entirely on the fact that the recipients were not required to return the CDs to conclude that the transfer was “properly characterized as a gift or sale,” and Augusto's subsequent sale of the CDs was “protected by the first sale doctrine.” 558 F. Supp.2d at 1062.

In reaching their conclusions, both the Vernor and UMG courts relied heavily upon a 30-year-old criminal copyright case, United States v. Wise , 550 F.2d 1180 (9th Cir. 1977). In that decision, the Ninth Circuit, in large part but with one exception, affirmed a multiple count conviction of a defendant for criminal copyright infringement for illegal distribution of copyrighted movie prints. The defendant contended that his distribution of the film prints was not an infringement because it was protected by the doctrine of first sale. According to the Ninth Circuit, the majority of the prints had been transferred by the studios to various entities or “V.I.P.s” with express provisions regarding broadcast or exhibition, for a limited time period, with provisions requiring the prints be returned to the studios. The court held that these prints were licensed and therefore not subject to the doctrine of first sale.

However, the Wise court distinguished from the others one agreement between Warner Brothers and Vanessa Redgrave. That agreement allowed Redgrave to keep the print perpetually in return for an upfront payment, though it prohibited her from selling, loaning, or licensing the film. The Wise court held this agreement to be a sale, as opposed to a license. The Vernor and UMG decisions seized upon this distinction and held that the key factor to distinguish between a sale and a license is whether the transferee is entitled to perpetual possession.

However, earlier decisions in the Ninth Circuit do not place such an emphasis on possession of a copy to differentiate between an owner and a licensee. For example, in Wall Data v. Los Angeles County Sheriff's Dept. , 447 F.3d 769 (9th Cir. 2006), the court refused to allow a licensee the benefit of '117 of the Copyright Act, which allows an “owner” of a copy of a copyrighted work to make another copy in limited circumstances. The court in Wall Data stated that because the possession of the software was subject to an agreement with “significant restrictions on the purchaser's ability to redistribute or transfer that copy, the purchaser is considered a licensee, not an owner, of the software.” 447 F.3d at 785.

The Wall Data decision suggests that a court should consider a much wider set of factors in determining whether an agreement is a sale or license, rather than focusing upon whether there has been a grant of perpetual possession. In addition to considering the overall terms of agreement, a court should also consider whether the license is being used for anti-competitive purposes or whether it is primarily a method to promote or encourage a free or subsidized distribution. A free distribution is often assisted through a copyright holder's ability to control downstream use through licensing, as is currently becoming more common with open-source software.

Conclusion

It is likely there will be more decisions clarifying the proper test to distinguish between a licensee and an owner. In the meantime, practitioners should be careful to keep an eye on the changing rules. When drafting content licenses, it may be worthwhile, when possible, to include a requirement that the licensee return the product after the completion of the licensee's use or at least provide that the licensor retains the right to regain possession.

Jason D. Sanders is an intellectual property attorney practicing in New York. He can be reached at jasond [email protected].